The Return of the Missing Labor Force

Perhaps in karmic justice for the topsy turvy election of 2016, the monthly jobs report from the Bureau of Labor Statistics sent mixed messages to Americans about the job market going into next Tuesday’s election.

Jobs gains slowed in October to 161,000, below expectations and the lowest growth since June (and some of this may in fact be due to Hurricane Matthew). After gaining consistently throughout the year, labor force participation also took a step backward in October, with an additional 425,000 Americans dropping out of the labor force. These are not gaudy numbers for sure—a rapidly growing job market would be adding more than 200,000 jobs per month and delivering 3 to 4 percent wage increases on an annual basis.

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But what the job market recovery lacks in strength it has made up for in length. The economy has now added jobs for seventy-three months in a row and the unemployment rates has stayed at or below 5 percent for the past year. The steady improvement on the jobs market continued to make its way to the paychecks of working families, with the average hourly wage up 2.8 percent over the last year, the best reading in more than seven years (July 2009). Workers are gaining confidence—12.3 percent of the unemployed in October had quit their job, the highest reading of this sort since October 2007. This is a great signal that those employed are gaining the confidence to quit a bad job to find a new one. With prime-age employment peaking, we are getting to the stage in the recovery that those with jobs are feeling more confident about their standing—so much so that they are voting with their feet to find better jobs. But we still need employers to ratchet up their hiring to pick all of those who remain on the sidelines.

The biggest problems in the labor market have been issues that have lingered below the headlines: first and foremost is labor force participation. Throughout 2014 and 2015, a growing percentage of Americans were giving up altogether on the job market even as the economy was gaining millions of jobs. In fact, labor force participation reached a thirty-eight-year low in September 2015. As we have written about before, labor force participation shrunk even among prime-age workers (not school or retirement age), with an unprecedented low number—62.4 percent—of working-age Americans either unemployed or out of work in September 2015.

The low labor force participation rate has gotten a rash of recent attention with economist Nicholas Eberstadt of the American Enterprise Institute arguing that the trend of low participation can be traced back to issues beyond the labor market. Eberstadt posits that the rise in the use of disability benefits is keeping men who have traditionally dominated the labor force out of it. The debate is essentially whether the decline in labor force participation is a result of structural factors (like disability or the rise in incarceration) or simply a function of the strength in the economy.

As Century Foundation fellow Jeff Madrick pointed out in a recent review of Eberstadt’s book in the New York Review of Books, a fundamental problem has been a lack of demand for the workers who have dropped out of the labor force, particularly men without a college degree. Over the long term, the decline of unionized manufacturing jobs and the rise of service sector jobs has decreased the number of quality jobs available for prime-age workers. More good paying jobs today require college degrees and rising women’s educational attainment has increased competition with men. Over the short term, many long term unemployed workers laid off during the great recessions have dropped out of the labor force because of the lack of decent paying available jobs. This problem has been compounded by the fact that laid-off, middle-income workers rarely leave unemployment for a lower-paying or higher-paying job—and fewer middle-income jobs are available today than in past recoveries.

Recent data indicate that a truly strong jobs market could indeed moderate this structural decline in labor force participation. The labor force did shrink modestly in October, by 425,000 Americans and 0.1 percent decline in the labor force participation rate. But overall, the labor force participation rate has grown from 62.5 percent to 62.8 percent over the last year, meaning that 2.6 million more Americans are in labor force than a year ago. The Economic Policy Institute has been tracking the missing workforce (what the size of the workforce would be if labor force participation rates were at historic levels). By their count, the ranks of missing workers have gone down from 3.9 million to 2 million since September 2015.

The consistent job growth has begun to put the brakes on these disturbing trends. Two-thirds of those becoming newly employed in October quarter are from the ranks of those who were completely out of the labor force the prior month. Figure 2 shows growth in the labor force by age, gender and race. Growth in the labor force has been widespread among these missing workers coming back into play. In fact, contrary to what some may think, male labor force participation is growing faster than women’s, which has leveled over last decade. Of particular interest, African-American men (hard hit by the recession and major structural disadvantages) have come back into the labor market faster than average. The older workforce is growing even faster than the senior population as declining retirement security is forcing many older Americans to continue working deep into retirement age. And these workers are more willing to take some of the low-paying retail, hospitality, and administrative services (janitors and the like) that have been growing quickly during the recovery—as they typically only need supplemental income.